On Thursday, 21 July 2011, Eurozone Member States agreed a second financial package for Greece. This e-bulletin provides an overview of the new financial support measures for Greece and summarises other significant EU financial stability developments since our March 2011 bulletin. These include measures to improve the European Financial Stability Facility (EFSF), further steps for the establishment of the European Stability Mechanism, the Euro Plus Pact and German law issues.
Second financial package for Greece
As outlined in our June 2010 bulletin, in May 2010, Eurozone Member States and the IMF agreed to provide Greece over €110 billion in loans over a three year period. It was expected that the assistance, coupled with austerity measures (ie measures to reduce public expenses, increase revenue and otherwise cut deficit spending), would enable Greece to return to the financial markets and raise needed capital in 2012. However, following a review in March of this year, it became apparent that Greece’s position would not be solidified within that timeframe.
In order to address the situation and avoid “contagion” effects on other Eurozone economies, on 21 July 2011, agreement was reached on a second €109 billion bailout programme for Greece. Like the first agreed package, the assistance will involve contributions from the IMF and Eurozone Member States (through the EFSF). Furthermore, unlike the previous package, the private sector will also provide assistance (through refinancing debt currently held and/or selling bonds back to Greece at a low price). The overall private sector contribution for the 2011-2014 period is expected to be €50 billion.
As compared to the May 2010 measures, loans extended by the Eurozone Member States through the EFSF will have extended maturities (from 7.5 years to a minimum of 15 years and up to 30 years with a 10 year grace period) and lower interest rates (equivalent to the those for loans provided under the EU Balance of Payments facility to non-Eurozone Member States, but without going below EFSF funding costs). The maturities of the loans provided to Greece under the May 2010 programme will also be extended. Furthermore, the revised EFSF lending rates and maturities will apply to Portugal and Ireland.
European Financial Stability Facility
In our March 2011 bulletin, we explained that several measures to strengthen the EFSF were being contemplated. On 13 July 2011, an amendment to the EFSF Framework Agreement was signed by Eurozone finance ministers. The purpose of the amendment is to increase and otherwise improve the financing capacity of the EFSF. The main changes which are envisioned by the amendment are that (i) the effective lending capacity of the EFSF will be increased to €440 billion, (ii) the maximum guarantee commitments will be raised to €780 billion, and (iii) the EFSF will be permitted to purchase bonds on the primary markets on an exceptional basis. The amendment will enter into force once necessary national parliamentary procedures are completed (it is hoped that this will be by the end of 2011 at the latest).
Some have questioned whether the direct purchase of debt by the EFSF would violate Article 125(1) of the Treaty on the Functioning of the European Union (TFEU). Article 125(1) prohibits Member States from being liable for or assuming the commitments of another Member State. To the extent that a Member State sells bonds in order to pay for previously undertaken obligations, it could be argued that, by directly purchasing bonds, the EFSF and the respective Member States behind the EFSF are becoming liable for or assuming the commitments of another Member State.
However, whether Article 125(1) TFEU was meant to extend to measures which only indirectly have that effect is not entirely clear. Therefore, it is possible that the direct purchase of bonds by the EFSF may not violate Article 125(1) TFEU.
European Stability Mechanism
As we reported in our March 2011 bulletin, the EU has agreed to establish a permanent European Stability Mechanism (ESM) which would replace the EFSF (set to expire in 2013) and result in the abolition of the European Financial Stabilisation Mechanism (EFSM). The creation of the ESM is contingent on an amendment to Article 136 TFEU and agreement among Eurozone Member States regarding its funding and operation. Since March 2011, significant steps have been taken for the realisation of the ESM.
On 25 March 2011, the European Council adopted a decision to amend Article 136 TFEU so that an EU legal basis can be created for the ESM1. The amendment will become effective following agreement from the Member States. It is hoped that national approval procedures will be finalised this year.
Meanwhile, on 11 July 2011, the Eurozone Member States signed a Treaty which defines the governance structure, powers and other key aspects of the ESM. Like the EFSF and EFSM, the purpose of the ESM will be to mobilise funding and provide financial assistance to Eurozone Member States under strict policy conditionality when they are experiencing or are threatened by severe financial problems. In accordance with the recently agreed amendment to the EFSF, the ESM Treaty authorises financial assistance in the form of loans or, as an exceptional measure, via the purchase of bonds on the primary markets. Furthermore, it stipulates that the capital base of the facility will be €700 billion, and the lending capacity set at €500 million.
If the ESM is implemented, like for the EFSF, whether the direct purchase of bonds on primary markets is consistent with Article 125(1) TFEU could be an issue (see discussion under European Financial Stability Facility above).
Euro Plus Pact
At the 24-25 March 2011 summit of the European Council, a “Euro Plus Pact” was agreed by the Eurozone Member States and joined by Bulgaria, Latvia, Lithuania, Poland and Romania. The purpose of the Pact is to strengthen the economic pillar of the EU economic and monetary policy, and ultimately provide greater financial stability in the EU.
The Euro Plus Pact has it origins in “Competitiveness Pact” measures described in our March 2011 bulletin which were proposed by Angela Merkel and Nicolas Sarkozy. As explained in that document, while the EU has a common monetary policy, it does not have a common economic policy. Hence, the initiative of the Eurozone and other participating Member States to create more convergence in their respective policies.
The Euro Plus Pact requires each participating Member State to provide commitments on an annual basis with respect to four main objectives. The objectives are:
- Foster competiveness – this objective seeks to ensure that wages are evolving in line with productivity and will be evaluated by measuring “Unit Labour Costs” for each country.
- Foster employment – the objective is evaluated on the basis of long term and young unemployment rates, and labour participating rates, with measures such as tax reforms to promote employment (eg lower tax rates) and labour market reforms to promote “flexicurity” given particular attention.
- Enhance sustainability of public finances – the purpose of this objective is to determine whether debt levels are sustainable based on current policies, notably pension schemes, health care and benefit schemes and taking into account demographic features.
- Reinforce financial stability – fulfilment of this objective requires the implementation of bank stress tests coordinated at EU level on a regular basis and involves monitoring of private debt for banks, households and non-financial firms.
The commitments made by each Member State are subject to monitoring by other Euro Plus Pact Member States on the basis of a report from the Commission. While the monitoring process and associated peer pressure will likely have an impact on the policy choices Member States make in relation to the objectives described above, the Euro Plus Pact does not involve any strictly binding legal obligations.
German law issues
As mentioned in our June 2010 and March 2011 briefings, three cases have been lodged in Germany which involve claims that German financial assistance provided to Greece and under the EFSF is inconsistent with the EU Treaties and other aspects of German law. On 5 July 2011, a joint hearing in all three pending cases took place before the German Federal Constitutional Court. At this stage, it is unclear how the Court will rule on the issues, but it is possible that, at a minimum, the Court will require a parliamentary vote on all future requests for bailout funds. The ruling is expected in autumn 2011.